In a significant victory for brokerage customers, the Supreme Court has declined to accept an appeal by Irving Picard, the Madoff Securities trustee, from a decision by the Court of Appeals for the Second Circuit, Picard v. Ida Fishman Revocable Trust (In re Bernard L. Madoff Investment Securities LLC) (analyzed in our previous alert), that sharply limits the remedies available to trustees in brokerage liquidations, and provides significant protections for innocent customers of fraudulent brokers. For former customers of Madoff Securities, Picard will be limited to a two year reach back period for fraudulent conveyances (he sought a six year reach back period), and will not be able to prosecute preference actions. For Picard, he will have to forego approximately $1.8 billion in potential recoveries, potentially reducing the amount that will be paid on Madoff Securities claims.
The Fishman decision directly affects approximately $1.8 billion of fraudulent conveyance and preference actions brought by Picard and therefore may reduce the amount available for Picard to distribute to creditors. There also likely will be further litigation regarding whether the safe harbor applies to other defendants, such as institutions that engaged in transactions with feeder funds that were enmeshed in the Madoff fraud and defendants whom Picard has accused of knowledge of or complicity in the Madoff fraud.
The Second Circuit’s opinion, which remains controlling, also may support a more general and far-reaching defense in ongoing Madoff avoidance actions. Since the safe harbor does not apply to federal “actual intent” fraudulent conveyance cases, for which the reach back period is two years, many of the former Madoff Securities customers will have to continue to defend clawback actions brought by Picard regarding payments made during the two years before the beginning of the Madoff Securities liquidation case. However, the logic and language of the Second Circuit’s opinion in Fishman supports the alternative defense that Madoff Securities received value from customers in return for the challenged payments, because those payments satisfied “enforceable securities entitlements.” In any event, the case will certainly affect the ongoing debate over Bankruptcy Code safe harbors.
Note: Kleinberg Kaplan served on the Steering Committee for defendants in this litigation.